Ampco-Pittsburgh Corporation (AP) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Brian and I will be your conference operator today. At this time, I would like to welcome everyone to the Ampco-Pittsburgh Corporation’s 2015 Earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the event over to Masha Trainor, Vice President General Counsel and Secretary.

Thanks Brian. Good morning everyone and welcome to our earnings call for the second quarter of 2015. My name is Masha Trainor and I'm the Vice President General Counsel and Secretary of Ampco-Pittsburgh Corporation. With me today are John Stanik our Chief Executive Officer; and Dee Ann Johnson, Chief Financial Officer; Rhodes Hoover, President and Chief Administrative Officer and also Present is our Chairman, Robert Paul. Before we begin, I need to read the following Safe Harbor Statement regarding forward-looking information. Statements or comments made on this conference call may be forward-looking statement and may include financial projections or other statements of Corporation’s plans, objectives, expectations, or intention. These matters involve certain risks and uncertainties many of which are outside of the Corporation’s control. The Corporation’s actual results may differ significantly from those projected or suggested in any forward-looking statement due to a variety of factors including those discussed in the Corporation’s most recently filed Form 10-K and subsequent filings with the Securities and Exchange Commission. We do not undertake any obligations to update or otherwise release publicly any revision to our forward-looking statements. I will now turn the call over to our Chief Financial Officer Dee Ann Johnson.

Thank you, Masha. Good morning everyone. Sales for the second quarter of 2015 were $60 million versus $69.9 million for the second quarter of 2014, a decrease of $9.9 million or 14.2%. The decrease is primarily attributable to our Forged and Cast Engineered Products group. Gross profit as a percentage of net sales was 19.6% for the second quarter of 2015 versus 20.8% for the second quarter of 2014. Selling and administrative expenses were $9.2 million for the second quarter of 2015 in comparison to $9.5 million for the second quarter of 2014, a decrease of $300,000 or 3.1%. Other expect fluctuated primarily as a result of changes in foreign exchange gains and losses. For the second quarter of 2015 gains on foreign exchange transactions approximated $175,000 and resulted principally from the rebound in the value of the euro against the U.S. dollar during the quarter. Second quarter of 2014 incurred foreign exchange losses of approximately $26,000. As of June 30, 2015 our estimated annual effective income tax rate is expected to approximate 37.6% compared to 33.7% for 2014. The increase is primarily due to lower beneficial permanent differences. In summary, the corporate incurred a net loss for the quarter of approximately $520,000 or $0.05 per common share versus net income of $1,121,000 or $0.11 per common share for the second quarter of 2014. From a segment perspective, sales for our Forged and Cast Engineered Products segment decreased approximately $7,900,000 or roughly 17% for the second quarter of 2015 compared to the second quarter of 2014. The decrease is primarily attributable to a lower volume of traditional roll shipments offset by a slight increase of other forging products. An operating loss was incurred for the quarter due to the lower volume of shipment and under recovery of cost resulting from the lower production levels and weaker margins. Weighted average exchange rate used to translate sales of our UK operations from the British pound sterling to the US dollar were lower for the second quarter of 2015 than a year ago, which reduced sales by approximately $1,400,000. The change in the weighted average exchange rates did not have a significant impact on operating results for the current quarter. Sales for our Air and Liquid Processing segment for the second quarter decreased by approximately $2 million or 8% primarily from a decline in shipments of heat exchange coils to the industrial and fossil fuel utility markets, and of air handing units as a result of lower order intake at the end of last year. Sales of pumps improved however principally due to a higher volume as shipment to the power generation market. Operating income for the second quarter of 2015 for this segment increased due to product mix and cost containment. Backlog at June 30, 2015 approximated $151 million in comparison to a $168 million at December 31, 2014. A decrease of $17 million were 10%, backlog for the forged and cast engineered products group decrease $22.4 million as a result of lower demand from roll customers to continue to operate below capacity having shipments to outpaced new orders. Further impact in the roll business is the strong US dollar and British pound against most major current international currencies, especially the Europe. Backlog for the air and liquid processing group increased $5.2 million and benefited from higher order intake for pumps and air handling units while orders for heat exchange coil decrease principally due to reduced activity in the fossil fuel utility in industrial markets. Regarding our balance sheet, cash and cash equivalent equal to $93.1 million at June 30, 2015 in comparison to $97.1 million at December 31, a decrease of $4 million. Dividends to our shareholders approximated $3.8 million and out of pocket cost associated with our as best as related liabilities for just under $2 million year-to-date. Account receivable decrease $9.3 million from year-end, primarily due to lower revenue in the second quarter of 2015 versus the fourth quarter of 2014. Inventory is increased approximately $10.2 million at June 30, 2015 from December 31, 2014 primarily due to higher inventory levels for the forged and cast engineered product segment including higher raw material levels to take advantage of reduce pricing and to a lesser extent delays in the delivery of rolls. Employee benefit obligations decreased at June 30, from December 31, by approximately $7.1 million primarily as a result of the partial freezing of the US define benefit pension plan in the first quarter as with discuss during our last call. Moving on to cash flows the corporation generated net cash flows from operating activities of approximately $5.4 million for the current year period in comparison to $1.6 million for the six months of 2014. The majority of the improvement is associated with changes in working capital. Net cash flows used in investing activities approximated $5.4 million for the six months ended June 30, 2015 versus $6.2 million for the six months ended June 30, 2014. And related principally to capital expenditures for our forged and cast engineered products segment. As of June 30, 2015, we have commitments for future capital expenditures of approximately $11 million, the majority of which is expected to be spent in 2015. I will now turn it over to John.

Thank you Dee Ann. Our second quarter results were disappointing, we continue to suffer from depressed market conditions in our main customer based, the Western Steel Industry. However, I’m excited about the progress or corporation may during the quarter as we move closure to the revitalizing Ampco-Pittsburgh and turning around our financial performance. I’ll talk more about these achievements later in my presentation. But first let me add some color to the second quarter results. Summarizing our Air and Liquid Processing segment revenue was down approximately 8% year-over-year and Forged and Cast Engineered Products division formally called UES was down 17%. The revenue shortfall was the reason for the poor results especially UES is decreased, it’s very simple. For Air and Liquid Processing the revenue reduction was primarily due to the Aerofin division and the Buffalo Air division. Aerofin is loss sales this year fiscal its Coal fired Power Plant Market segment as low investment has being made in that industry and also from each industrial market. Buffalo Air revenue results were somewhat misleading as there was what I refer to months-to-months variation and shipments that some delayed into the third quarter. I am happy to report that Buffalo Air had a slightly profitable quarter in Q2 and has booked to business that will fill our shop through the end of 2015. The Buffalo Air group has worked very hard at reducing their costs and improving performance. Overall, the Air and Liquid Processing segment improved operating income for the quarter year-over-year by more than 10% despite an 8% reduction in sales. The lack of UES shipments provided the most negative impact on the quarter. With revenue down 17% year-over-year, our cost reduction efforts and efficiency improvements just couldn’t offset the shortfall. And the loss of manufacturing utilization resulted in poor absorption of fixed costs. You may remember that during our first quarter call, I mentioned I was concerned about Q2 revenue. Due to lower than historical new order bookings in Q3 and Q4 of 2014 and some delays from customers requesting deliveries of roles, shipments were low in the quarter. When backlog drops as it has over the last few years, our manufacturing utilization eventually drops also and it becomes difficult to observed fixed costs. This leads to increases of unit costs and lower operating income directly, therefore it’s a double hit. I’m not going to spent much time talking about market conditions recently steel industry executives have discussed this topic very fairly. I will say orders in Q2 were very hard to combine in North America and Europe. This has East somewhat in North America during the last two months of Q2, but it’s far too early to say that things are improving in North America and Europe has not improved. Regarding things, we can control and moving on. Allow me to talk about some of the exciting things we accomplished during Q2 that will improve future performance. Efforts to capture what I refer to is one-time cost reductions are now nearly complete. Two examples include, the define benefit pension plan Dee Ann mentioned for most employees was frozen June 30, 2015 and replaced with a 41K contributory program. A reduction enforce of approximately 3% of our global base was completed as we centralize our back office departments. The grand total of these and other onetime reductions is nearly $10 million captured from Q1 through today. However, much of this impact will not hit P&L until next year. We implemented a new product development process and restructured this organization in order to work on new offerings that the market wants and to do that as quickly as possible. The increased funding is being planned. After completing a GAAP analysis of used key senior new hires have been added to the company to focus on important areas of development. We are intent on building a stronger company not only committed to reducing costs. Sales representation changes are being evaluated and will soon be implemented to improve our commercial efforts in new markets. The strategic planning process is progressing nicely. Commercial projections will be finalized in August. Our early results predict double-digit compound annual growth rates for revenue for the next three years organically, in other words without acquisitions. We are progressing on establishing a new bank credit deal. And M&A process has been instituted and a target funnel created with several opportunities moving through that process. We plan to utilize our cash to invest in market diversification possibilities and industry consolidation opportunities. Speaking about acquisitions, we completed our first one on July 29th. The company whose assets we acquired is named Alloys Unlimited & Processing Incorporated. And the newly acquired business is now part of the Forged and Cast Engineered Product group. It was a small acquisition but a significant one to us. We added a new business capability, a distribution center possessing fast response to customer needs for engineered forged products outside our normal markets. Globally there is a $4 billion forged product market out there and we hope to capture it. Few roles are only a small part of that market. Fast response generally means higher margins as we meet customers' urgent demands. Thus we see this as a revenue growth potential and a margin improvement opportunity. I am not satisfied with our second quarter performance but I am satisfied with what we accomplished during the quarter. In fact with every passing day I get more excited about the future prospects of Ampco-Pittsburgh. Looking ahead unfortunately in the short-term our prospects are not promising. The remainder of 2015 will be difficult. Q3 revenue will again be low. In fact I fear our bottomline in Q3 could even be somewhat worse than the bottomline at the second quarter. New order bookings during April and may were low. June and July were somewhat better but they will have little to no impact on Q3. That concludes my comments. We will now take your questions.

Before we take the first question I would like to clarify our response to a question that was posed during the first quarter conference call regarding the curtailment of our U.S. defined benefit pension plan. Moving forward, assuming no changes in actuarial assumptions, we expect the net savings in future pension expense approximately $1.5 million to $2 million.

Okay. Brian, we will now take questions.

Just want to make one short closing remark. It’s very frustrating to watch a company work so hard and improving creating an excepting change and not see those efforts result and a quicker improvement to company performance. But delay is an evadable especially when facing difficult market conditions. And we have to understand this is where we are right now. I believe all our efforts are helping to establish a positive culture at the Ampco-Pittsburgh, which will make more improvements in the future and most importantly develop and implement this strategic plan that leads us to prosperity. That’s why I feel so much more excited and optimistic today than I was on my first day seven months ago. Thank you.

Ladies and gentlemen this concludes today’s conference call. You may now disconnect.